Clampett, Inc., has been an S corporation since its inception.On July 15, 2020, Clampett, Inc., distributed $50,000 to J.D.His basis in his Clampett, Inc., stock on January 1, 2020, was $45,000.For 2020, J.D.was allocated $10,000 of ordinary income from Clampett, Inc., and no separately stated items.What is the amount of income J.D.recognizes related to Clampett, Inc., in 2020?

Question

Quizplus · Accepted Answer

J.D.'s distribution of $50,000 is nontaxable because it is less than or equal to his basis in the stock ($45,000). Thus, J.D.'s basis in the stock is reduced by the amount of the distribution, to $-5,000, which is negative. J.D. must recognize income, however, from the allocated income, which is $10,000. He recognizes income only to the extent of his basis in the stock, which is negative ($-5,000). Thus, J.D. recognizes $5,000 of income from Clampett, Inc. ($10,000 of allocated income minus $5,000 of basis).